Avoid Surprise In Margin Trading In Forex

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					Avoid Surprise In Margin Trading In Forex
Even when individual investors believe they understand margin trading, they can sometimes get into
a bad financial situation. Use the tips below to understand some common mistakes individual
investors make when it comes to margin trading in forex.

The risks involved in forex trading are naturally amplified with the more money you trade. While most
materials about forex trading address profit potential, the riskiness of forex trading makes it at least
equally important to pay attention to worst case scenarios. Margin calls are often the worst-case
scenario instance for many new forex traders.

Everyone knows that you should never invest more than you can lose but still many people in forex
trade on margin. Remember that margin trading represents using some of your own money, and
increasing your buying power by also using borrowed money to purchase currency pairs. The money
in your account will be represented as a total but you should never omit consideration of what you
borrowed. If you put in only two percent of the money in your account, the 50:1 margin, losses
accounting for more than two percent of your account balance mean that you are losing money
because you are exceeding the money you put in, and are now dipping into borrowed money.

Consider possible losses when you are looking for trading on margin ratios. There is much valid
advice about maximizing your borrowing power by searching for the highest margin ratios you can get
from a forex broker. The advice is valid because higher ratios mean that you have to put less of your
money down as a percentage of what you can borrow. However, it is critical to remember that you are
borrowing more as the ratio increases. If you somehow got an individual account with 400:1 margin,
meaning you would only have to have one quarter of a percent of your money to borrow on your
margin account rather than the more typical two percent or five percent of the money you are using to
trade, your losses can be more significant because you are borrowing more of the money you are
using to trade currencies in forex.

Different brokers have different rules about margin trading. In addition to different ratios of borrowing
available to traders, different brokers have different rules about how and when they will stop your
trading if you get close to having too little money in your account to meet your margin requirements.
Pay attention to these rules. Some brokers will emphasize that they have two levels they try to notify
you about: the margin call level which is based on an amount requiring somewhat more in your
account then is required by your margin ratio, and a stop out level which is your margin ratio level at
which point your account can start to automatically be liquidated until it reaches sufficient levels to
meet minimum margin requirements.

Some brokers only use margin calls as synonymous to stop out level which means your account will
begin being liquidated until you reach minimum margin requirements.

Most forex brokers will indicate that they have a notification policy when your account reaches levels
where you are going to have a margin call, but provide that sometimes such notice will not be issued
so that it is your responsibility to meet minimum margin levels whether or not you receive a warning.
Similarly, some brokers allow for a period of time for you to correct the situation such as 48 hours, but
others begin closing down your account right away when you drop below minimum margin

If your account is suspended, closed or liquidated many brokers will specifically tell you that they can
seek to recover the money you borrowed that your account didn't cover through a lawsuit. This is true
for any loan and should not be ignored by investors. Simply closing down your account would only be
partial payment for your loan in this case and you could lose more than the money you invested
through a lawsuit.

Forex traders who believe they understand the concept of margin trading can still get into trouble
because of some of the details of such trading. Use the tips above to identify common oversights
margin traders often make that can cost them money.

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Tags: Forex
Description: account then is required by your margin ratio,  and a stop out level which is your margin ratio level at